Complicating Inflation

Calculating inflation of the US dollar was fairly easy back in the old days – gold was somewhere on the order of $16 an ounce during the California Gold Rush and during our own Virginia City days.  The real complication came in 1944, at a place called Bretton Woods, when the decision was made to peg international currencies to the US dollar (which was then pegged to gold).

Habits have a way of becoming habitual.  While the Bretton Woods agreement basically fell apart back when Nixon was a President, there were 30 years when hanging on to US dollars was as good as hanging on to gold – and a lot lighter.  The US dollar is the world’s currency.  Here are some estimates:

“There are now officially more $100 bills in circulation than $1 bills. The interesting aspect is that when we dig deeper, what is revealed is the fact that the bulk of them are being hoarded outside the United States. This is very interesting for we see the same basic trend emerging from the dollar v other currencies. There is a shift to the dollar as the US economy continues to hold up the entire world.”

“More recently, the amount of US currency in circulation outside the United States has now exceeded 70%.”

Posted Aug 22, 2019 by Martin Armstrong 

Now I’m kind of accustomed to Canadian currency, living just south of the 49th.  But most Canadian hundred dollar bills are in Canada.  Most Mexican currency is in Mexico.  That simple fact makes inflation easier to quantify in our neighboring countries.

“What is the U.S.’s greatest export? Banknotes. There is probably no other product for which the balance of trade is so tilted in the U.S.’s favour. No foreign bills circulate in the U.S., but U.S. bills are eagerly used all over the world.

According to the Federal Reserve, there are currently $1.74 trillion paper dollars in circulation. How many of these notes circulate in the U.S. and how many are used overseas?

Because banknotes cannot be tracked, this question is particularly difficult to answer. This blog post explores several approaches for determining the location of notes. These approaches offer a wide range of estimates, from as low as 40% of all currency being held outside of U.S. borders to as high as 72%.”

Posted July 3rd, 2019 by JP Koning

If we split the difference, and assume that 56% of US currency is outside the country, that means 0.97 trillion is outside our borders and .76 trillion inside.  It’s easy to see why printing more money hasn’t been as inflationary to the US as to smaller nations whose currency is not the international reserve.

The national debt is about 30 trillion dollars.  Of that, 6.5 million is owed to US government agencies – if you add in the portion owed to social security, about half the national debt is owed to retirement funds of one sort or another.  The Treasury notes 7 trillion owed to foreign governments and international investments.  My guess is that our national debt isn’t a great inflationary factor at present – but it has the potential to become one.  The article linked above has a lot more specific data.

It is easy to think of inflation as caused by printing too much money – but the Post-Columbus treasure fleets of Spain, bringing silver and gold to Europe, in about 150 years, raised Europe’s prices by about six times.  On the other hand, that massive importation of precious metals still only caused about an annual inflation of about 1.5% – something that today would be regarded as stable.  Too many dollars chasing a finite amount of goods.

That data is easy to find searching the net – and it lets us see why US politicians can spend a lifetime in elected offices and still not understand that printing more money creates inflation: Most US dollars are outside the United States. 

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